Swiss Abandon Currency Cap

The Swiss franc has appreciated 20% against the pound following the release of the long-standing cap. The removal of the cap on a maximum value has meant the Swiss franc has become almost too strong against the Euro.

Swiss stock markets have fallen by more than 10% in reaction to this, and the euro-franc currency market descended into relative chaos. Experts claim that the European Central Bank was expected to launch a quantitative easing scheme within a week, causing the Swiss to act without warning.

The abandonment of the currency cap has meant that investment banks across the world have experienced losses. This has meant that investment prices have fluctuated substantially, causing problems for brokers; in particular, those whose policies cover client losses in the short term.

There are concerns that further appreciation of the Swiss franc against the euro could have considerable ramifications on Swiss exports, particularly as half are completed within the Eurozone.

Switzerland is said to be acknowledging the weakened franc and its consequences on the real estate market. The Swiss National Bank has said this is a rational move to protect Swiss long-term growth and inflation expectations. Yet, where investors have typically favoured the Swiss franc for its stability, the recent actions of the Swiss National Bank are likely to result in uncertainty and overvaluation of the franc.

Rather than simply assuming that the Swiss might have caused chaos within Europe, it is important to consider other European countries that are likely to cause greater harm to the Euro.  Perhaps, the Swiss have been told something that our press have yet to discover.

Are the Swiss onto something by removing the currency caps?

It is clear that the Swiss have taken action to reduce the consequences of measures taken to save weaker economies, and protect their growth and stability. This is to be expected considering the overall global market is predicted to grow less than first stated. Italy, France and Germany have all been downgraded, which then poses the question of whether Switzerland are aware of the potential imbalance the euro might suffer, and are therefore making plans to reduce the impact. 

Although the price of oil has declined by 55% and this is expected to boost global growth by 0.7%, experts are stating that this will not be sufficient to offset the slow rates of investment and poor overall growth. Similarly, the low oil price is expected to alleviate some inflation pressure and enable the banks to keep the interest rates low, but the political instability is likely to prevent considerable growth.

Experts are stating that the UK continues to lead in the ‘growth league’, which poses the question that perhaps Britain needs to take note of the Swiss National Bank’s actions and be prepared for future instability.

The Swiss have made it clear that they do not want to be held back by the poor economies in Euro. It is possible that the uncertainty surrounding the Greek election has prompted them to extract themselves from any direct involvement to ensure their economy is not affected.

The favourite to win the election at the moment is left-wing, Syriza party who are suggesting proposals which might equal the beginning of the end of the euro. Syriza have stated they will return to the drachma, if they win the election, and will negotiate a deal with the European Union to reduce the austerity measures and a large chunk of their debt.

Whilst it might seem like there is potential in removing a poor economy from the euro-economy, returning to the drachma could trigger a standoff between the Greece’s European Union and the IMF’s leaders, which could in turn result in another financial crisis.

It seems that Switzerland is aware that the regulation of the euro across various economies, each performing at different rates, is destined to be problematic. The disparity between the economic situations requires some countries’ currencies to be devalued, but the use of the euro reduces the ability to adopt necessary measures. 

The political instability appears to have prompted the Swiss to take action, which in turn, might encourage others to make changes. What if Germany returned to the Deutschmark? It is likely that, as with Switzerland, there might be a trade imbalance. Both Germany and Switzerland export mainly to Europe, and if their currency strengthens, it is likely they will export more than is imported. This could have detrimental effects on the Germany engineering and car-manufacturers markets.

We can only speculate that the recent moves by Switzerland are in anticipation of greater changes in Europe that our press are unaware of at the moment. However, it does seem clear that their actions may prompt other to act.